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January 11, 2012

What About Apple?

First the disclosure: I am a bull on Apple. I like their products and am bullish on the future, even without Steve Jobs.

But many analysts apparently think it is time to bash Apple since Steve died. Consider the last earnings announcement. By all measures, Apple continued its recent growth both in revenues and net income, but the market yawned and Apple stock dropped. Some anlaysts appeared to be confused since the iPhone 4S had just been released prior to the announcement and thus those sales could not be included in the results, but analysts expressed disappointment anyway. It has become fashionable to discuss why Steve Jobs' departure will cripple a 400 billion dollar company - really? One man was responsible for all of the innovation, engineering and great product design? No doubt, Steve will be missed, but this seems over the top.

Another example appeared on Yahoo Finance this morning. The headline: "These 9 Brands All have Better Reputations Than Apple Right Now". Reading the story, one finds that Apple ranked tenth in the survey of consumer recognition and favorable attitude, but the article notes that Apple has not even made it into the top ten in the past three years! Re-read that headline. Does that make sense? Shouldn't the headline have reflected that Apple is moving up in consumer recognition? Once again, it was fashionable to put the negative spin on any story about AAPL.

As traders, that leaves us in a quandry. Apple will announce earnings January 24. By all news accounts, the iPhone 4S has been a huge hit. The iPad still commands a huge market share in spite of Amazon's newest Kindle. So I have no doubt that the announcement will reveal spectacular results - but how will the market react? Will analysts continue to search for evidence to support the thesis that Apple is dead without Steve Jobs?

Apple stock has been on a tear upward the past couple of weeks, so your bullish Apple plays have been doing well, but what should we do in advance of the earnings announcement? It certainly seems possible that Apple stock could drop in price even after a stellar announcement (buy the rumor and sell the news). So I am a bit wary of outright bullish plays. I will be looking at two possible plays in advance of earnings. One is a simple ATM straddle and the other is an iron condor. On the day before the announcement, I will price the straddle and determine whether the stock price is likely to move far enough to make that trade profitable. I suspect the straddle may be too expensive, but we'll see.

The other possibility is the iron condor. As long as the spreads encompass the expected price range after the announcement, the drop in implied volatility will drive an increase in the profitability of the condor, a negative vega position.

It will be an interesting market event to watch. Hopefully, we can make it a profitable one as well.